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In the wake of the 2008 financial crisis, policymakers and financial institutions devised some strategies for helping troubled homeowners – even if many advocates argue those steps were not enough.
But a new study shows that mistrust of banks kept millions of Americans from taking advantage of those options, denying them thousands of dollars in savings and perpetuating the housing distress that erupted from the crisis.
The study, conducted by three Columbia Business School professors, relied on preapproved refinance offers sent by what they call a “major financial institution” to 550,000 of its borrowers through the Home Affordable Refinance Program.
The borrowers did not have to do any work to initiate the refinance, nor pay any fees, and the HARP program was created by the government as a response to the crisis – all leading to a very favorable set of conditions for borrowers.
Yet 51% of those contacted chose not to refinance, passing up nearly $9,000 in savings, on average.
The researchers also conducted a survey of about 4,000 of the homeowners contacted to gauge how strongly they believed the refinance offer was in their best interest.
“Survey data indicate that, among all the behavioral factors examined, only suspicion of banks’ motives is consistently related to the probability of accepting a refinancing offer,” the authors wrote in an abstract.
How deep does that suspicion go?
The researchers also worked with the financial institution that had sent out the refinance offers to boost customer interest in those offers in three ways. First, they used Fannie Mae and Freddie Mac “to increase the credibility of the offered program.” They also offered a $500 cash back reward if the process took more than 30 days. And they offered a gift card as an immediate incentive to apply for the refinance.
“We report the results of three field experiments showing that enticing offers made by banks fail to increase participation and may even deepen suspicion,” the authors wrote. “Our findings highlight the important role of trust in financial decisions.”
These findings aren’t only of interest to those concerned with household finances or consumer behavior, the authors note. When homeowners can’t afford their mortgage, a long list of other parties suffer: banks and other lenders, bond investors, mortgage servicers, neighbors, local governments, and more. And the broader ripple effects into the economy from millions of Americans unable to spend or move for better job opportunities have been substantial and lingering.
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